Owe income taxes for this year or prior years? Facing wage garnishment or levy on your bank account? Bankruptcy may be able to help you resolve your tax problems. Lengthy books full of legalese have been written about discharging and paying taxes in bankruptcy, so there is not room on this website to explain everything there is to know. But, we can give you some basic information. Bankruptcy attorneys look at several questions in deciding whether and how a bankruptcy might assist a person with income tax issues.
The first question is what taxes, penalties, and interest are owed for which tax years?
The second question concerns the facts about assessment of the taxes: Were the returns timely filed by the taxpayer, or did the IRS prepare substitute returns? How much are the taxes, interest, and penalties for each year? Has there been any audit or additional assessment of taxes?
Next, we look at what collection action has been taken so far. Has a lien been filed? Have accounts been levied on?
And, we look at what actions you may have taken in the past to challenge, settle, or pay the taxes. Did you make an offer in compromise? File a previous bankruptcy? File an appeal of a tax assessment?
That information helps us to advise you whether the income taxes can be discharged in bankruptcy.
As a general rule, taxes can be discharged in Chapter 7 bankruptcy if three conditions are met:
- The taxes are for a tax year where the return was due at least 3 years before the filing date of the bankruptcy.
- The taxpayer filed the return at least two years prior to the filing of the bankruptcy case.
- The taxes have been assessed by the IRS for at least 240 days prior to the filing of the bankruptcy case.
- Taxes that do not meet those requirements are not discharged in Chapter 7.
In Chapter 13 cases, taxes that would be non-dischargable in Chapter 7 cases, must be paid as part of the Chapter 13 plan. But, only the tax amount itself, plus pre-bankruptcy interest, must be paid. Penalties do not have to be paid.
If the IRS has filed a proper tax lien, the taxes for any year covered by the lien are considered ‘secured’ debts, at least up to the value of any real or personal property covered by the lien. In Chapter 7, personal liability for taxes can still be discharged, as discussed above, but the lien continues to attach to any property and the lien survives the bankruptcy so that the IRS can collect from any property that existed at the time of filing the bankruptcy.
In Chapter 13, the IRS’ lien is valued based on the value of the property to which the lien attaches. Property can be sold by the debtor to satisfy the lien, or the debtor can pay the value of the lien through the Chapter 13 Plan. When the plan is complete, the taxes are discharged and the lien released.
Consult Your Attorney
Tax issues are complex. Be sure that your Corona Bankruptcy Attorney has substantial experience reviewing IRS tax transcripts and evaluating whether your income taxes are dischargeable. Call now for a consultation.